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Some indication of progress on US fiscal talks, anticipation
that the Fed extends QE3+ tomorrow, speculation of a cut in China’s required
reserve, healthy Spanish T-bill auctions and a much stronger than expected
German ZEW survey is encouraging risk-on plays, with the dollar and yen
laggards, peripheral bonds firmer, and emerging equity markets extending recent
gains. European shares are advancing for the seventh
consecutive session.
Outside of the euro, the major currencies are struggling to
extend gains against the greenback. The
sterling may be struggling on the back of reports that suggest two large UK
banks will be paying $2.5 bln in fines to the US though it is a bit simplistic
in this day of high finance to expect the banks simply to go to market and
purchase the dollars. Separately the UK’s
RICS house price balance fell to-9% from -7%, while the market had looked for
improvement.

The Swiss franc is back on the defensive as well. New that UBS was going to charge fees on
franc deposits encourage speculation that the SNB may do the same, or lower its
franc ceiling, at Thursday’s quarterly review.
UBS had an existing program, before Credit Suisse’s announcement last
week, but today’s move seems to be broadening it to include all 3rd party
bank customers. The euro pushed through
CHF1.21, but has thus far remained well below the ~CHF1.2165 high from last
week.
The dollar extended yesterday’s recovery against the
yen. Recent data leaves little doubt that the
Japanese economy is contracting for the second consecutive quarter. Deflationary forces continue to be
evident. Next week BOJ meeting comes on
the heels of this weekend’s national elections.
Political and economic considerations have favored the weak yen story. The five-fold increase in gross short yen
futures contracts at the IMM since early Oct illustrates the extent to which
sentiment has shifted. Meanwhile,
option-related offers near JPY83 are thought to be helping provide a cap to the
dollar.
The German ZEW survey showed investor confidence
unexpectedly rose to a seventh month high.
And why not? Tail risks in the
euro area have been reduced (more owing to the ECB, over the BBK’s objections). The German stock market has rallied strongly,
with a 5.6% gain in the past month alone (28.3% year-to-date). The ZEW seems more optimistic on the German
economic outlook that than the BBK itself which last week warned of a contraction
here in Q4 and growth not returning to Q2 13.
Italian bonds and stocks are firmer today. Some observers have down played the recent
political events, suggesting that all that has happened is that the election
will be help a few weeks earlier than previously anticipated (Feb instead of
March). Yet something more profound has
happened. It revealed the weakness of
Monti’s technocratic government reforms.
They lack a certain democratic legitimacy. This means that they do not have broad based
support. It is seen in the platforms of the
major and minor political parties, all of which seems to take exception with this
or that reform.
Many ask if Italy can
live without Monti, but he has been prime minister for a single year. Perhaps the question is can Italy live
without Berlusconi, who has served three times as premier. Although his party is lagging in the polls, an
alliance with the North League and coupled with the growing disenchantment with
austerity and recession (which is associated with Monti and the center-left PD
seems more committed to) coupled with arcane electoral rules may be sufficient
to give Berlusconi a fourth term.